Looking at GDP from a labor perspective, growth comes either from having more workers or from more productivity, that is, from workers creating more stuff per hour on the job. (Yes, you can get more output by not letting workers go home and forcing them to work 100 hours a week. But that’s not going to last long, so economists generally ignore this possibility.)

The trend growth rate of the population in the US is, depending on who we ask, somewhere between +.7% and +1.0% per year. For reasons best known to itself, Congress spends an inordinately large amount of time, in my view, devising ways to keep a lid on this paltry number by prohibiting immigration. So, as a practical matter, the only way to get GDP to expand in the US by more than 1% is through productivity growth.

The weird thing about productivity is that it’s a residual. We don’t see it directly. Productivity is a catchall term for the “extra” GDP that a country delivers above what can be explained by growth in the number of people employed. Economists figure it’s the result of employers providing better machinery for workers to use, technological change, and improved education + on the job training.

Productivity peaked in the US shortly after the turn of the century at around +2% per year, accounting for the lion’s share of national GDP growth. It has been falling steadily since. Over the December 2014 and March 2015 quarters, productivity dipped into negative territory. This is hopefully a statistical quirk and not the sudden onset of mass senior moments throughout the workplace.

why worry?

Over the long term, the disappearance of growth through productivity gains implies economic stagnation in the US. (My personal view is that the productivity number are the aggregation of a highly productive tech-oriented sector and a low/no-productivity rest of us hobbled by a weak public education system …but, as a practical matter, who knows? By the way, productivity figures don’t include government.)

The more pressing issue is that no productivity gains means employers aren’t finding ways to make their employees create more output per hour worked. That is, they have no way of offsetting higher wages other than to try to pass costs on by raising prices.

the bottom line for investors

Conventional wisdom is that the Fed will take a long time to shift from extreme economic stimulation through emergency-low interest rates back to normality. Both stock and bond prices also seem to me to have imbedded in them the idea that “normal” will be lower in nominal terms than it has been in the past.

A bout of inflation induced by rising wages could change that thinking in a heartbeat.

To be clear, dangerously accelerating inflation isn’t my base case for how the economy will play out. And no one is thinking that the US will only grow at about 1% annually from now on. All the more reason to keep a close eye on how productivity figures evolve.